Thursday, October 19, 2006

Pay By Touch, Paypal & Google Pose Genuine Threat to Card Companies

CHICAGO, Oct 19, 2006

The days of merchant-subsidized credit card rewards programs, rapid increases in interchange fees, and confusing fee structures for credit card purchases are numbered, according to new research by Diamond Management & Technology Consultants, Inc.

Consumers are already seeing popular "cash back" and other reward programs being curtailed. Banks are fearful of losing a large fraction of their $19 billion in interchange fees that fund these programs. And if merchants successfully steer customers to competitive payment types, banks stand to lose a significant slice of the transaction volume that drives their card interest income, usually estimated as 70 percent of total credit card revenue.

"Merchants are unhappy with what they consider unreasonable credit card fees and are beginning to take serious steps to minimize their expenses," said Carl Hugener, a partner in Diamond's financial services practice.

"Left untreated, the landscape of the $150 billion card industry could be altered drastically in the next three to five years and end up costing issuing banks and card associations billions."

As for payment alternatives, Automated Clearing House (ACH) payments appear capable of siphoning payment volumes away from credit cards and instilling bargaining power with merchants at the expense of card issuers and associations.

Emerging competitors like Pay By Touch, PayPal, and Google Payments pose a genuine threat to dominant card operations.

At one level a credit card is simply an authentication device that proves who its user is and gives access to the consumer's account. The process through which the user is authenticated begins the routing of the transaction over the card network. But separating authentication from the card would allow merchants to drive consumer payments to low-cost avenues.

"History tells us that once models are taken apart this way, more and more alternatives arise, and the systems eventually fall apart," Hugener said.

The credit card business has been a bonanza for banks over the past several decades. It will continue to be a great business if the industry recognizes the coming change and adapts before emerging competitors do," Hugener said.